BRADENTON, Fla. — The Alabama Supreme Court ruled Friday that local governments in the state can file for bankruptcy regardless of whether or not they have outstanding bonds or warrants.
“It is clear that the Legislature intended to authorize every county, city, town and municipal authority… to file for federal bankruptcy protection,” the panel ruled.
The ruling is related to the city of Pritchard, whose Chapter 9 case was suspended in 2010 after a federal judge ruled that the city did not qualify to file for bankruptcy because it had no outstanding bonds.
The ruling also has a bearing on a recent appeal of Jefferson County’s eligibility to file for bankruptcy by the Bank of New York Mellon and seven other creditors who argue that the county only has outstanding warrants, not bonds. BNY Mellon is trustee for most of the county’s $4.23 billion of warrants, including $3.14 billion of defaulted sewer warrants.
Alabama law states that local governments that “authorize the issuance of refunding or funding bonds may exercise all powers deemed necessary” to adjust their debts. A second sentence says that “without limiting the generality of any of the foregoing powers, it is expressly declared that the governing body shall have the power” to adjust its debts.
The Supreme Court said that despite the reference to refunding and funding bonds, the second sentence “provides the state’s general assent to and authorization for counties, cities, towns and municipal authorities to seek federal bankruptcy protection.”
Just hours after the opinion was handed down, Jefferson County notified Federal District Judge Inge Johnson. Three weeks ago, Johnson allowed an eligibility appeal to go forward at the request of BNY Mellon and other creditors. It is likely that the Supreme Court’s decision will make the appeal moot. The trustee declined to comment on Friday’s ruling.
BNY Mellon is also seeking an appeal of the bankruptcy judge’s ruling suspending the powers of the state-court appointed receiver to run the sewer system.
Jefferson County filed the largest municipal bankruptcy in U.S. history in November after failing to negotiate a restructuring agreement with sewer warrant holders.
About the same time the restructuring talks were under way last July, the county asked to file an amicus brief in the Pritchard case before the Alabama Supreme Court, saying then that it had “an acute interest in the availability of federal bankruptcy relief,” according to court documents.